2014-03-25
According to the efficient markets hypothesis, “security prices at any time ‘fully reflect’ all available information ( Fama, 1970; 383 ).” This is a description of EMH in its strong form, which according to Fama, “is probably best viewed as a benchmark against which deviations from market efficiency (interpreted in its strictest sense) can be judged.” I find EMH troubling, not because it is...
2014-03-22
What is “roundaboutness” of production? What is a production period? These words are thrown around in Austrian circles, but as Inigo Montoya would say, “I do not think it means what you think it means.” An illustration with present values will make this more clear. First, a decription of the cycle from Ludwig von Mises in the Theory of Money and Credit So long as the rate of interest on loans...
2014-03-17
Leading into the recent crisis, and especially after the Federal Reserve responded with “quantitative easing” [QE], the press was a flurry in talks about inflation. Over 5 years after the first QE, commodity prices have not risen in proportion to the increase in the monetary base. The hyperinflation predicted by many has failed to materialize. Why is this so? Anyone who has taken a course in...
2014-02-25
In Prices and Production Hayek writes, Firstly , that money acts upon prices and production only if the general price level changes, and therefore, that prices and production are always unaffected by money - that they are at their ‘natural’ level, - if the price level remains stable. (7) Macroeconomic aggregates do not act upon one another. Equations that describe macroeconomic activity provide...
2014-02-21
There are three shortcomings of the Hayekian triangle I wish to bring to light. 1) Empirically, prices in all stages of production tend to move together. 2) Related to critique 1, the Hayekian triangle assumes an economy at full employment equilibrium. 3) The Hayekian triangle is an incoherent representation of the macroeconomy. In his book, Risk and Business Cycles , Tyler Cowen considers points...
2014-02-18
Some of the most powerful tools of modern macro lack micro-foundations. Given the sort of micro-foundations that have been attempted to this point in time, I don’t mind that my research employs aggregate demand (AD) as equivalent to the money stock (M) times velocity (V). In other words, the quantity theory as an accounting identity is a useful tool for macroeconomic analysis. For those not...
2014-02-16
Roger Garrison’s Time and Money lays out explicitly the Austrian Business Cycle Theory with a focus on the impact of central bank intervention. His exposition is clear. In fact, so clear that it lays out a fundamental weakness in the theory. In the chapter title, “Sustainable and Unsustainable Growth”, Garrison argues booms funded by an increase in real savings don’t result in resource...
2014-02-13
New Keynesians are a variant of old monetarism. They are grappling with the same macroeconomic questions. Why does the economy experience extended periods of disequilibria? One New Keynesian answer, for example, is sticky nominal price and real wages. Despite a newly proposed answers, the question itself is not a Keynesian question. This brings me to the problem that Simon Wren-Lewis at Mostly...
2014-02-12
A few excerpts from Fundamental Thoughts in Economics will suffice to make this point. Cassel was highly skeptical of political power and believed that economic analysis was necessary to check the efforts to expand government's scope when that expansion was unwarranted and the goals of the expansion were unrealistic. The observance of this rule [to minimize assumptions in modeling] enables us to...
2014-02-11
When Keynes wrote his General Theory , he emphasized solutions to the problem of depression and did not worry himself with the reason for the Great Depression. This is understandable as a change in policies contemporary to Keynes might have helped fend off further deepening of the Depression. As the gold standard was intimately tied to problems, Keynes perception of its operation might provide...